Royal Bank (RY.TO)

Caller interested in a 3 year hold. It is a goodish term of hold. It is one of his favourite of the 5 big Canadian banks. They are getting a battering because people are generally against the banking system. They have all been punished.

Thinks banks are just going to be flat lining. This one looks okay in the high $60s and is currently in the low $70s. There is a whole pocket of support at around mid-$60 levels. This bank is at the top of the heap, so if there is one financial of all the financials that he would hold, it would be this. Doesn’t see a lot of downside, but also not a lot of upward movement. There is no reason to sell Canadian banks.

(A Top Pick Feb 10/15. Down 7.73%.) The banking sector has been down on a one-year basis. Thinks this is on concerns that the Canadian economy is going into a recession. The whole banking sector, including this one, is really attractive at this time. Trading at very low valuations. Gives you a yield of about 4.5%.

(A Top Pick Feb 25/15. Down 4.88%.) Still likes it and has been buying recently. When you can buy banks at 10-11 times earnings, with a 4.5%-5% yield, it is worth while. Banks have pulled back because of a number of factors, including worries about the economy and energy exposure. This one is a very diversified bank.

New Preferred shares? Thinks this is referring to one that was just issued that has an annual dividend rate of 5.5%. A nice new benchmark rate with about a 465 spread reset. This stabilizes the preferred market, and is one you can buy and hold.

(A Top Pick Feb 26/15. Down 13.63%.) Banks have been hit more recently, basically a matter of getting money out of the market. They are having pressure on the net interest margin side because of low interest rates. What is working well for them is the wealth management side and capital markets. (See Top Picks.)

Royal Bank (RY-T), Bank of Nova Scotia (BNS-T) or both, or should he wait? (His Top Pick is another bank that you must own!) Both these banks have big domestic retail and the cash from domestic retail gets reinvested into growth areas. In the case of this bank, it is primarily in wealth management and capital markets, more volatile businesses. He would do a half position on each, but wait.

He is inclined to think that regardless of oil prices, this bank will continue to make profits every quarter in the billions. We are not seeing any breakdown because of mortgages geographically.

Banks have been quite flat over the last year or so. When you are looking at PE ratios down to the 10 marker, they start to become somewhat attractive. But you also have to look at where the Canadian economy is going regarding oil prices and how it affects the banking sector. He likes this bank, but wouldn’t overweight the banks.

The valuations of banks are attractive. They are at the low end of their 20 year range. Canadian investors look at Canadian banks. They are secular outperforms and have beat the markets 75% of the time since 1970. When international investors look at Canadian banks, they see a high ROE with no recovery. Consumer debt levels have grown to a concerning level in Canada. They want some valuation upside through ROE improvement. They can’t do that because the banks are already too good. He does not think the next 20 years will be as good as the past 20 years. The same drivers that propelled the stock prices will not be there.

$80 in 3 year’s time? He would buy any of the Canadian banks now. They have had a big pull back. If you factor in yield, growth and pricing, it could reach $80-$85-$90. It just depends on market circumstances.

(Top Pick Jan 21/15, Down 1.02%) He sold in August to lower his exposure to the Canadian economy and bought BBT-N which is an eastern seaboard US regional bank.

Safe? A big picture issue overhanging all of the banks is where they get close to a point where they may have to increase their capital. This bank has the 2^nd best tier 1 capital ratio of all Canadian banks, so they have room. The only thing that would put their capital into jeopardy would be a major acquisition, but that would be viewed by the market is favourable. He wouldn’t be concerned about this bank.

The sector has undeservedly lagged. They increased the dividend 8%, earnings increased 9%, but the stock is down. They just closed on City National in the US, which focuses on high net worth.

The exit strategy for this is Nov 27, right when they come out with their earnings. This is a solid bank, but right now there are too many headwinds. Technically it hasn’t shown a lot of strength. Dividend yield of 4.3%.